Bioenergy Outlook: Defending The Renewable Fuels Standard

Edward Niblock

BioCycle February 2013, Vol. 54, No. 2, p. 45

Although major advances in climate change and renewable energy policies are unlikely this year, there is still much that can and must be done. It is true that there are major obstacles to progress in Washington DC, but further repeating the discouraging prognosis will not be helpful. Instead, Bioenergy Outlook — BioCycle’s new bioenergy column — will, in this and occasional future columns, make some practical suggestions as to achievable policy goals for the bioenergy industry. The first such suggestion is defending and strengthening the Renewable Fuels Standard (RFS).

First created in 2005 and then revised in 2007, the RFS is a fairly straightforward concept. Retail sellers of gasoline are required to mix a certain amount of renewable fuel into their fossil fuel. The percentage ratchets up very slowly every year. The original law was mostly about corn ethanol, and if you notice at the gas station that your pump contains some small amount of ethanol, that’s the RFS in action. Renewable fuels are by and large more expensive than traditional fuels, and gasoline retailers are a very effective and fair way to spread the cost of encouraging renewable fuel development across the entire driving public.

This is an important aspect of renewable energy policy to acknowledge and confront head on. Renewables cost more, and if a society wants them it must spread that cost in the most efficient and fair way possible. A variety of options exist to do this: Government incentives spread the cost across the taxpayer base; credits and tariffs spread the cost across the energy user base (whether that is electric ratepayers or vehicle users); and bans, restrictions or limits force affected industries to pass the cost of the regulation to their customers or suppliers. If any one of those cost spreading mechanisms is over-used, it can harm the economy or result in economic injustice. But they are all valid and legitimate methods if used intelligently.

In 2007, the RFS was overhauled as part of a new energy law, and became known as “RFS2.” Under RFS2, an overall percentage requirement for all blending of renewable fuels including ethanol still exists, but there are now subsection carve outs to encourage newer, nonethanol fuels. These new categories are biodiesel, cellulosic biofuels and advanced biofuels. An anaerobic digester facility that produces compressed renewable natural gas for use as transportation fuel is producing an “advanced biofuel” under the regulations.

Since every gasoline retailer everywhere in the country cannot always blend in the exact amounts of biofuels required — especially now with the new carve outs that require the blending of fuels not widely used — there is a system of marketable credits known as Renewable Identification Numbers (“RINs”) that can be used to ensure compliance. Once produced, batches of renewable fuels can be separated from their RIN, and the RIN can be sold separately so that Obligated Parties (what the law calls the gasoline retailers subject to the requirement) can comply by purchasing credits instead of actual fuel. Although RIN markets are just emerging and are still unstable, it appears very likely that RFS2 will create, over time, successful industries producing the various categories of next generation biofuels at prices low enough to encourage vehicle fleet upgrade and conversion.

Administration of all this falls to the Environmental Protection Agency, which often seems to end up with the most difficult and thankless jobs in the nondefense part of the government. In almost everything the EPA does, development and adjustment of policy is unfortunately an endless three-act-play. First the legislation tells EPA to do something, then EPA proposes and enacts regulations to do it, then EPA is sued by either the private sector for doing too much or the environmental community for doing too little. Sometimes it is sued by both sides at the same time, which, perversely, might be its best way of knowing it got it about right.

Attempts To Undo And Weaken

Opponents of RFS2 are therefore attacking EPA on all fronts. They are roving the halls of Congress looking for members who will try to abolish RFS2, they engage the rulemaking process to try and weaken the regulations, and they are filing lawsuits as described below. Some of their arguments are quite legitimate, but none justify undoing the program. Their concerns are basically twofold. First they claim there is not enough renewable fuel or RINs to buy to meet the targets EPA is setting (as part of the EPA’s administration it sets the required percentages every year). Second, they are concerned about RIN fraud, which has undeniably occurred in a few instances, but which EPA is addressing.

Whether or not there was sufficient renewable fuel to purchase equal to the requirements set by the EPA was a topic of spirited debate last year. The two major areas of argument centered around crop failures and whether a cellulosic ethanol industry even existed at all. In the end, EPA heard all the arguments and made the decision not to adjust the levels; the agency deserves at least the presumption that it made a rational decision.

Nonetheless and perhaps appropriately under our current system, that decision was the subject of two lawsuits last year. A recent decision in one has clarified that although the EPA has the authority to set the targets, it must do so based on its assessment of what the renewable fuel industry is likely to produce, not what the EPA would like to encourage it to produce. This not totally unreasonable decision will hopefully result in some revised targets that are more achievable but still encourage the renewable fuel sector to grow.

The second concern is that there have been some instances of RIN fraud, leading Obligated Parties to worry if they are buying legitimate credits. In 2012, based on a small number of cases that amounted to single digit percentages of the total market, opponents of RFS2 were extremely vocal and passionate in highlighting and overstating the RIN fraud problem both in the general media and on Capitol Hill. All agreed the problem should be fixed in a nonhysterical way, and EPA announced on January 31 proposed rules to establish a Quality Assurance Program to protect purchasers from fraudulent RINs in the future.

With these two issues safely on the way to being addressed, opponents of the program could, theoretically, dial back their attempts to completely dismantle it, but this is unlikely. Unsurprisingly, the Obligated Parties are not so sanguine about their role in the cost spreading described above, and will continue to agitate against the program. Supporters of renewable fuels would do well to follow this issue and direct their attempts when needed to protecting the program.

Finally, it is worth noting that the conversion of the U.S. vehicle fleet to nonpetroleum fuel sources is the defining issue of our time. There is nothing more important to our foreign policy, our national defense, our economy, our health, or our environment than weaning our transportation infrastructure off fossil energy. Therefore even if the RFS was flawed (which it is not) it would still be worth keeping.

Ted Niblock is General Counsel for Turning Earth, LLC, and is cochair of the American Biogas Council’s Federal Legislative and Regulatory Affairs Committee.

Editor’s Note: After many years of authoring Biomass Energy Outlook, Mark Jenner is stepping down from writing his monthly BioCycle column. The editors thank Mark for all his contributions and insights. Starting in this issue, BioCycle has a new column, Bioenergy Outlook, authored by Ted Niblock, General Counsel with Turning Earth, LLC.

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